Patrick Reemts is Vice President of Credit Risk Solutions at ID Analytics, a consumer risk management company.
In a recent blog post, Mr. Reemts answered some common questions about the use of alternative credit data.
Who benefits from alternative credit data?
There are many studies that focus on the usefulness of “alternative credit scores” for the underbanked (1), but it’s important to understand that all Americans can benefit from these products. Given that many Americans had challenges during the Great Recession, such as higher utilization on their credit cards, any new information that can help differentiate a “high risk” individual from the “I just had a little trouble” consumer would be useful. In addition, consumer spending on communications technology is accelerating (2) including high-speed internet, pay TV and wireless service. The level of spend in this area can be a strong indicator of a consumer’s financial stability and creditworthiness. Many of our clients – in fact, most of them – eventually use our alternative credit scores on their entire population because of this new connected and recovering economy.
It is true that the underbanked benefit greatly from alternative credit data. A recent study from Bankrate.com showed that the majority of millennials between the ages of 18 and 29 do not have a credit card, which likely puts them into the “underserved” bucket given they have minimal credit information available. In response to this trend, many banks have shown increased interest in leveraging alternative credit data to establish relationships with what is now the largest consumer generation (3).
Which industries stand to benefit the most from evaluating alternative credit data?
We have yet to see an industry that wouldn’t benefit from the use of such products. The retail and bank card industry and auto lenders are certainly the most common, along with the technology sector. Many businesses in these industries are looking to meet their growth objectives while minimizing risk from credit-related losses and alternative credit tools can help support those objectives. The mortgage industry has been the slowest to adopt, because even with programs like HUD, whose mission is to “create quality affordable homes for all”4– mortgage lenders are reluctant to adopt new risk management tools due to the heavy oversight from Fannie Mae and Freddie Mac.
There doesn’t seem to be much of a practical appetite to adopt alternative credit data tools, even though everyone is motivated to do the right thing.
How do lenders use “alternative credit” to evaluate credit worthiness/risk? What was done in the past?
Right now, we see the majority of our customers enabling universe expansion programs to fuel their new customer acquisition efforts. By using alternative credit solutions during the application process, organizations can realize a significant benefit and potential competitive advantage. By offering consumers the credit, they deserve, lenders and service providers can establish long lasting relationships and gain real loyalty in their portfolio base. The financial benefits can be measured easily in the short term, and will continue to pay back dividends for years due to the customer’s affinity to the brand that “gave them a chance.” Whether you have specific goals around the underbanked or just general growth goals, alternative credit information can be used to help the assessment. As a matter of fact, it’s generally considered good business practice to have consistent credit policies across all of your populations, staying away from any specialized processes that may be seen as treating different groups with different policies.
1. CFSI (08 May 214) What If People Got the Credit They Deserve? Retrieved April 17, 2015 from http://www.whatworksforamerica.org/what-if-people-got-the-credit-they-deserve/#.VTGKUPnF_AQ
2. TIA (24 June 2014 Driven by Big Data, Telecom Spending Grows Faster in the U.S. than Internationally for First Time; U.S. Passes EU to Become #2 Region retrieved April 17, 2015 from http://www.tiaonline.org/news-media/press-releases/driven-big-data-telecom-spending-grows-faster-us-internationally-first
3. Fry, Richard (16 January 215) This year, Millennials will overtake Baby Boomers PewResearch Center retrieved April 17, 2015 from http://www.pewresearch.org/fact-tank/2015/01/16/this-year-millennials-will-overtake-baby-boomers/
4. U.S. Department of Housing and Urban Development mission statement, retrieved April 17, 2015 from http://portal.hud.gov/hudportal/HUD?src=/about/mission